Pages

Thursday, April 20, 2017

Bill Mitchell — MMT is what is, not what might be

Must-read. 'Nuff said.

Bill Mitchell – billy blogMMT is what is, not what might beBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

35 comments:

Where MMT got macro wrongComment on Bill Mitchell on ‘MMT is what is, not what might be’

MMT consists of a political part and a theoretical part. The MMT developers “set out in the early 1990s to construct a better way of doing macroeconomics.” In the following, the exact point is located where MMT-macro went methodologically wrong. The political part of MMT is not adressed.

Methodology demands to start with the most elementary economic configuration. In the beginning the economy consists only of the household and the business sector. No public sector, not foreign trade.

MMT is right, microfoundations is the wrong approach. The correct approach is macrofoundations.#1,#2 The elementary version of the objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia:

https://commons.wikimedia.org/wiki/File:AXEC62.png

From this equation follows:(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.(ii) Increasing investment expenditures I exert a positive influence on employment.(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R.

Total monetary profit for the economy as a whole is given with Qm≡Yd+(I-Sm)+(G-T)+(X-M), which reduces to Qm≡I-Sm for Yd, G, T, X, M = 0. The reduced macroeconomic profit equation says that the monetary profit of the business sector Qm is equal to the difference between investment expenditures of the business sector I and monetary saving of the household sector Sm (or dissaving -Sm as the case may be).

From the correct macrofoundations follows that the two statements of Bill Mitchell are provable false:― “The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.” Unemployment occurs when the expenditure ratio rhoE or/and the factor cost ratio rhoF is “too low”. Goverment spending/taxation can improve or worsen the situation.― “Net government spending is required to meet the private desire to save.” False. Given investment expenditures I, the private desire to save Sm determines monetary profit Qm.

As a matter of principle, full employment can be achieved without private/public deficit spending, i.e. rhoE=1, via the price mechanism by increasing rhoF=W/PR.

In methodological terms, MMT messed macro up because it got the elementary accounting equations wrong.#3

Egmont Kakarot-Handtke

#1 The macrofoundations approach starts with three SYSTEMIC axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

#2 For the introduction of money see ‘Essentials of Constructive Heterodoxy: Money, Credit, Interest’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569663

#3 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2153218

politics is an integral part of economics. your approach falls part at A0

as stated your conclusion of:"As a matter of principle, full employment can be achieved without private/public deficit spending, i.e. rhoE=1, via the price mechanism by increasing rhoF=W/PR."amounts to rhofF = 0/0sure enough, without a currency system there is no employment as per definition

The line of the argument is as follows. MMT is right, orthodox/mainstream economics is false. This is what already Keynes knew. In technical terms, the lethal error/mistake resides in the microfoundations. Keynes switched to macrofoundations but got it wrong.#1 MMT switched also to macrofoundations but got it also wrong.#2

The point is: when the foundations are false the whole analytical superstructure falls apart. The correct macrofoundations are given in the previous post.

From the correct foundations follow the correct systemic relationships for employment and total profit.

From the correct equations follows that there are basically two ways to arrive at full employment (i) deficit spending, (ii) to increase the wage rate faster than price and productivity, that is, to use the price mechanism.

Deficit spending has negative effects on the income distribution.#3 In the actual situation, the economic policy recommendation is therefore (ii). This is the best way to get out of unemployment, deflation, and stagnation.

To know how the monetary economy (i.e. the price and profit mechanism) works is the precondition for successful economic policy. The fact of the matter is that both microfounded mainstream and macrofounded MMT are provable false. Policy recommendations that lack sound scientific foundations are worthless or even counterproductive.

just because you proclaim "The ... most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm." as "objectively given" doesn't make it so.

"When government is added then it holds under the condition of zero saving of the household sector Qm=Cg-T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus."

what are you trying to say? there are no flows between the household and government sectors?

You ask: “the flow from the government sector to the household sector, and why by your assumptions it can’t be greater than taxes.”

This flow is called transfers and it has been left out of the picture here.

You ask: “so your argument is what? that more money flows from the government sector to the business sector than to the household sector?”

The profit equation Qm≡Yd+(I-Sm)+(G-T)+(X-M) reduces to Qm=G-T if Yd, I, Sm, X, M is set to zero and then it says: if government expenditure G is greater than taxes T, i.e. if there is a public sector deficit, then then profit of the business sector as a whole is equal to the deficit. In the opposite case, if the government sector runs a surplus, i.e. if G is less than T, then the loss of the business sector is equal to the surplus of the government sector.

The growing profits of the US economy in the past decades and the increasing ratio of profits to wage income are the mirror image of public deficit spending = growth of public sector debt (plus growth of household sector debt).*

Egmont Kakarot-Handtke

* See also ‘Austerity and the idiocy of political economists’http://axecorg.blogspot.de/2017/03/austerity-and-idiocy-of-political.html

You ask: “so how does arbitrarily setting various parameters of the profit equation to 0 somehow disprove it?”

The sole purpose of setting some variables initially to zero is to focus on the point at issue. The point at issue is here the relationship between public sector deficit/surplus and business sector profit/loss.

The other relationships have been dealt with elsewhere.

The rule of proper analysis is that one solves first the simple problems and then successively the more complex. As Morgenstern put it: “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.”

The crucial point is that MMTers do not even understand the most elementary case. Because of this, there is NOT NEED AT ALL to tackle the general case with the other variables of the profit equation different from zero.

By the way, you can do the general analysis for yourself. It follows ALL almost by itself from the structural/systemic/macro axiom set, just like the whole of geometry follows from the Euclidean axioms.

“There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.”

Scientific standards are well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

A theory must satisfy TWO criteria. Therefore, in order to refute a theory it is SUFFICIENT to prove that it is either logically false or empirically false.

MMT-macro is logically defective. As a consequence, all economic policy conclusions drawn from it are scientifically worthless. While every moron is entitled to an opinion, economists are NOT. Economics is a science and from a scientist KNOWLEDGE is expected. Scientific knowledge in turn is well-defined by material/formal consistency.

The political sphere and the scientific sphere have to be kept strictly apart. The political sphere is for morons with an opinion, the scientific sphere is for scientists with knowledge.

MMT is soap box economics because it does NOT satisfy the condition of logical consistency. It is therefore at best good for a sitcom.

The elementary case in economics is given with the pure consumption economy which consists of the household and the business sector. Neither Keynes, nor Post Keynesians, nor MMT got this simple case right. And the reason is that this so-called economists do not understand what profit is: “His Collected Writings show that he [Keynes] wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

So, Keynes did NOT understand the fundamental magnitude of economics. Worse, it is NOT the case that Keynesians or other so-called economists have realized or fixed the problem in the meantime. As the Palgrave Dictionary states: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

MMTers, too, messed up macrofoundations.

The most elementary economic configuration yields for total monetary profit Qm=-Sm. This simple equation is lethal for Keynesianism, Post Keynesianism, New Keynesianism, IS-LM, MMT to name only the macrofounded approaches.

With the public sector added the equation becomes Qm=-S+(G-T). With investment added it becomes Qm=(I-Sm)+(G-T). With profit distribution added it becomes Qm=Yd+(I-Sm)+(G-T). And so on, complexity increases in the course of analysis.

Advanced analysis is NOT needed, though, because it is pretty obvious that MMT messed already the elementary case up. Because of this, MMT economic policy guidance is the same brain-dead blather as Walrasianism, Keynesianism, Marxianism, Austrianism.

Note in passing that the the complex profit equation is testable with the accuracy of two decimal places. This, of course, is the way to settle the whole matter.

"Economics is a science and from a scientist KNOWLEDGE is expected. Scientific knowledge in turn is well-defined by material/formal consistency."

"The political sphere and the scientific sphere have to be kept strictly apart. The political sphere is for morons with an opinion, the scientific sphere is for scientists with knowledge."

While politics itself isn't a science political theory however is. Political theory and economics both deal with systems of human interaction and allocation of resources. They are therefore closely linked.

In order to give economic policy guidance economists need to know how the economy works: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economist do NOT have the true theory. After 200+ years they do not even know what profit is. This applies also to MMT. Political opinion is NOT needed, we have more than enough of this crap, but scientific knowledge is urgently needed.

The conclusions from the manifest failure of economists are: (i) to ban psychology, sociology, politics from economics and to leave it to sociology, psychology, political science,#2 (ii) to retire the whole bunch of incompetent scientists (Walrasians, Keynesian, Marxians, Austrians, MMTers, hog), and (iii), to focus on the question how the market system works.

Egmont Kakarot-Handtke

#1 See ‘Ditch scientific incompetence!’http://axecorg.blogspot.de/2017/04/ditch-scientific-incompetence.html#2 For details see cross-references Political economicshttp://axecorg.blogspot.de/2015/11/political-economics-cross-references.html

But then the question becomes the degree to which the science of economics is relevant to those making decisions that involve economics but the scope and effect of which are not exclusively economic but include social and political factors that do not fall within the scope of finance and economics.

Personal decisions are like that and so are public policy decisions.

It is also true of firms. Firms are concerned with efficiencies in production but efficiency doesn't result in sales. Effectiveness is competing to meet customer demand does, and customer's make economic decision based on factors that are not only economic.

This is why I distinguish between theoretical and practical in approaching economics. Theory provides models that may be useful in decision-making. But few decisions in life are made based solely on economic factors or even chiefly on economic factors.

Standardization in the commodity world has made it increasingly possible but many if not most economic decisions do not involves only standardized commodities.

Even otherwise standardized commodities are differentiated by branding, which adds a psychological and social dimension in addition to price. This is the basis for marketing and advertising. "It's not the steak but the sizzle."

Purchasers weigh "value." Value is the relation between relative cost (quantity) and features (quality). Value in the minds of customers is highly variable owing to factors that are not exclusively economic, such as design. The automotive industry is now ruled not so much by price and engineering but by branding and design, for example, and now it is the designers that rule the roost there.

The aim of science is to identify regularities that can be expressed quantitatively in equations. Finding regularity is a matter of scope and scale (micro, meso, macro). The first challenge is elaborating a framework in which different theories can compete with each other as explanations of events, events being that which changes over time under different conditions. Then the various models that are generated from theory need to be compared against data, which involves measurement and involves its own issues.

It is difficult to impossible to identify much regularity in change over time in the social world in comparison with the natural world that is useful knowledge, even using complication (chaos theory, fractals) or complexity (complex adaptive systems), let alone using simple (linear) static models.

Social engineering social science is nowhere near the level of engineering based on natural science or medicine based on life science.

Believing that it is and applying it in public policy, for instance, has been disastrous. Firms figured this out long ago and most business schools are based the case method.

I prefer science to religion, and that is what I would prefer economics to be.)

They are categorically different and comparing them risks falling into category error.

Humans construct the world(s) that they inhabit mentally through experience, reflection on experience, and story. Together these contribute to the construction of world views as cultural artifacts that are partially articulated in ideologies.

All cultures are ideological therefore to some degree "religious" with respect to their stories.

Science is supposedly value-free. Behavior and choice are regulated by values. Preference for a values-set and prioritization of values within it set the boundary conditions of an ideology as the articulation of a world view.

A "scientific" world view that is value-free is an oxymoron. So-called scientific world views that are "value-free" are riddled with assumptions that are normative, many of which remain hidden or unacknowledged.

There is no "objective" world view. Experience and reflection on it are a relation between subjective and objective, and all world views a a basis for culture contain stories.

Failure to recognize this is a form of Dunning-Kruger effect, where one presumes to knows more than one does or be more capable that one is.

This is the basis for Econ 101 or "economism" being used to formulate policy or serve as the final arbiter of "rational" decision-making.

There is no way to disentangle and disengage positive and normative other than in the most trivial cases. In most of life, quantity is permeated with quality, and fact with value.

You can research as many molehills as you like but with this method you will never arrive at the correct theory of the universe. The same holds for economics. The simple reason is that conclusions drawn from properties and relationships that are true for a firm cannot be generalized for the economy as a whole. This is the well-known fallacy of composition.

Example: One firm can increase profit by lowering the wage rate but for the business sector as a whole this does not work.#1 Because of this, economic policy that is based on microeconomic partial analysis runs inevitably against the wall.

Bottom-up is how Orthodoxy proceeds under the label of microfoundations: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

This molehill approach had been bound to fail already 140+ years ago. Keynes realized that microfounded economics had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up macrofoundations. This is why Keynesianism, too, is a failure.#2

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations down through intermediate levels (sectors, branches, firms, households) to the individual. Why? Because NO amount of microeconomic research will ever lead to the understanding of how the (world-) economy works.#3

The only thing that is methodologically correct with MMT is the move from microfoundations to macrofoundations. The subject matter of economics is an abstract entity called the (world-) economy and NOT the decisions that are taken in firms or before the yogurt shelf. Every junior consultant with some background in psychology and sociology and a statistics package on his laptop can do these kind of studies. That’s NOT economics.

The economist’s ambition goes beyond case studies: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables.” (Schumpeter)

MMT failed at this task. MMT’s macrofoundations are provable false.

Egmont Kakarot-Handtke

#1 See ‘Proﬁt for Marxists’https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301#2 See ‘The unfinished Keynes’http://axecorg.blogspot.de/2014/12/the-unfinished-keynes-test.html#3 See ‘Macro for dummies’http://axecorg.blogspot.de/2016/12/macro-for-dummies.html

Economics as it is practiced today is a religion. It is value-laden and fact free. To become a science, an applied science, economic theory has to have predictive power.

Building and maintaining an economy should be analogous to building and maintaining a bridge. How much failure are you willing to tolerate?

These are tools to be developed, not world views. If I had to choose between 'rule by scientists' or 'rule by ideologues, I'll go with the scientists. But that is a false dichotomy.

"Build it and they will come."

To date there is no scientifically objective and value-free science of economics (general theory or universal laws) that is useful for anything in spite of many very smart people having tried for centuries.

The world is still waiting.

Moreover, the notion that there is a scientific method that allows scientists to step outside of a world view and see "with God's eyes" is just nonsense based on current scientific findings about how brains function. Humans are prisoners of their biological hardware and socially developed software.

You say: “Moreover, the notion that there is a scientific method that allows scientists to step outside of a world view and see ‘with God’s eyes’ is just nonsense based on current scientific findings about how brains function.”

There is no need to invoke God’s eye, every person with a modicum of scientific instinct sees immediately that economics is a cargo cult science#1: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley)

Generation after generation of dull economics students has accepted supply-demand-equilibrium as an explanation of how the market system works. No God is needed to realize that economists have NO idea of the fundamental concepts of their subject matter, it’s in the Palgrave Dictionary.

No brain research is necessary to figure out that economists’ brains contain just enough cells to philosophize about methodology and politics but not enough to understand how the economy works.

It is no good idea to invoke God in economic matters. If HE does realize what economists have produced so far (Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, and silly excuses#2) he will make this heap of proto-scientific rubbish and methodological dilettantism disappear in a no-return black hole.

As far as MMT is concerned everybody can make it disappear in the waste basket with a rather small quantity of logical thinking.

Egmont Kakarot-Handtke

#1 Wikipediahttps://en.wikipedia.org/wiki/Cargo_cult_science#2 See ‘Failed economics: The losers’ long list of lame excuses’http://axecorg.blogspot.de/2017/01/failed-economics-losers-long-list-of.html

"Humans are prisoners of their biological hardware and socially developed software". [TomH]

I don't know whether you really think that Tom .... there is a key.

The heart at work (not the one that pumps blood):

Of course, that is the case, jrbarch.

The question is what the limits are if any.

Perennial wisdom holds that the limits are variable and these limits set the various states and stages of consciousness.

Key to the conceptual understanding of this is the model of the three worlds — gross, subtle and causal — and the three "bodies" that experience them — gross, subtle and mental, with the three worlds being manifestations of the unmanifest, which is beyond limitation.

As long as a person is functioning within the confines of one of the three bodies, experience is limited to that world.

The rare few that are beyond limitation are under no limitation.

"There cannot be anything hidden from the One who is everywhere present, for He is everywhere. And it naturally follows that when there cannot be anything hidden from this One He must also be All-Knowing, knowing everything.

"The infinite-Knowing is 'seeing' everything at one and the same time, and seeing it NOW. It is that Knowledge which does not begin and does not end; which is indivisible and continuous, and to which nothing can be added and from which nothing can be subtracted.

"It is that Knowledge which makes God at this moment know that which He knew when it occurred countless aeons ago, and makes Him know that which will occur countless aeons hence; that Knowledge which makes everything known to God simultaneously and NOW. It is the Knowledge of the Perfect Masters and the Avatar.

"In terms simpler to you it means that which you as individuals know at this moment I knew aeons ago, and what you individuals in ages to come will be knowing at a particular moment, I know now."

"How do I know everything? The nature of the infinitely complicated phenomenon—the Universe—is infinitely simple. But to know and understand this is infinitely difficult. When you know what Universal Mind, Universal Energy and Universal Body are and what their relation is to individual mind, individual energy and individual body you will understand how the Perfect Master knows everything.

"This all-comprehensive Knowledge is obtained in a flash. But to know everything in a flash takes an eternity in the illusion of time while you gradually die to your self. This dying to your self means completely losing yourself to God to find your Self as God.

"This dying to your false self is no easy task; raising a corpse to life is child's play compared to it."

Just wanted to show how peace (the heart) makes a difference via the ‘inside peace’ film - at a very human level with very human characters. i.e. peace ‘works’. Meher’s description of the One is interesting but beyond our immediate experience. Dying to the ‘I’ sounds eminently sensible to me; but not for everyone since it is the ‘I’ that pulls them along. There are seasons. Peace is something people can relate to right away because they can feel it; and from that place inside comes an understanding and knowing.

How do you relate to humanity, today, as they are, and say to them that what you are looking for is inside? There are more answers coming from that place inside, than mind could ever dream up questions for. That is the paradigm shift: - changing the polarity of consciousness (inclusively) from mind to the heart. Do I help – or do I hinder; that’s what I worry about!